4 Enemies of Bull Markets

All bull markets come to an end. The key for investors then is to get out before it happens. What exactly should they be looking for?

Inflation has killed almost every bull market in Cramer’s long career on Wall Street. That’s because inflation forces the Federal Reserve to tighten interest rates, which is the exact opposite of what investors want. They usually assume that rising rates will hurt earnings and make yield-based securities more attractive than stocks. As a result, money pours out of the market.

The second bull killer is, not just overvaluation, but “super extreme valuations,” Cramer said. Stocks were so expensive in 1987 and 2000 that earnings per share took a back seat to derivative measures such as sales per share, takeover values per share and outlier-year earnings.

Kill Bill Warnings

How to play a bull rally, with Mad Money host Jim Cramer.

“When you hear those justifications,” Cramer said, “I need you to run for the hills. Because you are indeed headed for the slaughterhouse.”

And you need jobs to sustain a bull market. They are crucial to keeping two-thirds of the economy, the consumer economy, moving. We can survive brief periods of weaker employment, but a jobless rate over 10% will stop a rally cold.

Lastly, just as leadership can generate a widespread bull market, lack of it can kill the bull. In 2007 and 2008, one leader after another – the techs, banks, health care, minerals and oils – collapsed. As a result, so did the followers. This is why Cramer said that leadership is so important. So investors should always be on the lookout for disappearing market leaders.

“Spotting and going full bore in a bull market is nirvana,” Cramer said, “but when you see the telltale signs that you’re being sent to pasture, leave the ring with your capital intact before the matador performs his final act.”